Malta fires starting pistol
For the past 25 years the riverless island of Malta has provided barren soil for defined contribution (DC) pension plans. Funded occupational pensions were effectively banished from the island in 1979, when the then premier Dom Mintoff introduced a compulsory state mandatory scheme termed as pay-as-you-go (PAYG) first pillar pension. Following its introduction all private pension schemes were unceremoniously disbanded.
Known as the ‘two thirds scheme’ Malta’s PAYG scheme provides a retirement pension equal to two-thirds of the average of the highest wage or salary earned in any three years before retirement, up to a maximum of Lm7500 (E16,500).
Since 1982, the self-employed have been entitled to two-thirds of their average earnings in the 10 years before retirement.
The scheme was intended to replace all existing private pension provision, including more than 20 private pension schemes which were revenue-approved occupational-based schemes.
However, as elsewhere in Europe, demographic change has put pressure on the first pillar PAYG system. A report in the mid 1990s by the Malta Council for Economic Development (MCED) said that the ratio of workers to pensioners would fall from four workers to each pensioner in 1996 to 2.3 workers to each person over 61 in 2025. It estimated that in the same period the pensions bill would rise from Lm 70m in 1996 to Lm 720m (E1,604m).
In response, the government set up a Pensions Welfare Commission in 1999 to look at the sustainability of the pensions system. One of its tasks was to recommend proposals for the reform of pension funding.
Four years later the Commission has yet to issue any recommendations.
Irritated by its procrastination, the government has pushed ahead and introduced enabling legislation for the reintroduction of funded occupational pensions on Malta.
The Special Funds Act 2002 is intended to promote the development of funded second pillar and third pillar retirement benefit arrangements. It does not discriminate between local or overseas schemes, since one of the aims of the legislation is to attract international companies offering retirement benefit packages and schemes to expatriates.
The new law will require schemes to be registered with the government. It provides for two types of registered schemes – DC or a defined benefit (DB) scheme. Employees can also use registered schemes to top up their existing pensions, and the self-employed can use them as personal pension schemes.
Employees will be able to move their pensions when they change jobs. Under the legislation, the Malta Financial Services Authority, the principal regulator of registered funds, may allow an employee to transfer accrued rights from one scheme to another and a scheme to transfer liabilities to another scheme.
The government is expected to include detailed proposals for second pillar pensions in its Budget proposals. George Mangion, senior partner of Malta-based actuaries and business advisers PKF Malta, says. “The starting pistol has been fired.”
The government is clearly pushing the social partners towards definite reforms in the pensions system, which will certainly include the second pillar.”
Reintroduction of tax incentives is also expected. This will be necessary if occupational funded schemes are to succeed, says Mangion. “The second pillar needs incentivising. At the moment there are practically no tax incentives. In the past, anyone who was careful enough to put money aside in a second pillar scheme would not have that money allowed as a deduction. But the industry is lobbying for that to be improved on.”
The response of the social partners is mixed. Currently employees and employees each contribute 10% of the payroll to the PAYG scheme. The employers say that currently they cannot afford to pay more into the pensions system. The director general of the Malta Employers’ Association (MEA), Joseph Farrugia, said last year that companies in Cyprus were not in a position to offer private pension funds.
However, in a seminar in October the MEA was more conciliatory. Its spokesman, Paul de Battista agreed that the PAYG system would not be adequate in the face of demographic changes but warned that any pensionreform must not increase the burdens on the employers.
The unions argue that the government should improve first pillar pensions before attempting to introduce second pillar pensions. The General Workers Union (GWU) has proposed that the government should raise the Lm7,500 earnings cap and create a pension reserve fund.
Generally, there is a feeling that private pensions should be used to top up the state pension rather than replace it – the role of third pillar personal pension.
However, the leading pension providers are optimistic. For example, Mario Grech, the chairman of Middlesea Valletta, one of the island’s leading insurers, sees a three pillar system, with an optional second pillar occupational pension, as the way forward.
Whatever happens, the government seems certain to take a lead in any reintroduction of second pillar occupational pensions – if only because it is the single biggest employer on the island.